Published: September 2026 | Fact-Checked & Audited By: Tax Calculators for UK Editorial Team (Chartered Tax Advisor & Accountant)
This guide is fully updated for the 2026/27 UK tax year. All statutory redundancy formulas, £30k exemption thresholds, and PENP notice rules are audited against active HMRC manuals and Section 401 ITEPA 2003.
Facing redundancy or negotiating a settlement agreement in the United Kingdom requires a clear understanding of HM Revenue and Customs (HMRC) termination payment rules. Under Section 401 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), qualifying compensation payments for loss of office or employment enjoy a statutory £30,000 tax-free exemption. However, navigating what qualifies for the £30,000 threshold and what is strictly excluded is critical to avoiding unexpected tax liabilities in the 2026/27 tax year.
1. How the £30,000 Redundancy Tax Exemption Works
The £30,000 exemption is a lifetime allowance per employment termination. Under UK tax law, qualifying termination payments are treated as follows:
| Termination Payment Element | Income Tax Treatment | Employee National Insurance (Class 1) | Employer Class 1A National Insurance |
|---|---|---|---|
| First £30,000 of Qualifying Redundancy / Severance | 0% (100% Tax-Free) | 0% (Exempt) | 0% (Exempt) |
| Qualifying Redundancy in Excess of £30,000 | Taxed at Marginal Rate (20%, 40%, or 45%) | 0% (100% Employee NI Exempt!) | 13.8% Employer Class 1A NIC |
| Accrued Untaken Holiday Pay | Taxed as standard earnings (20%/40%/45%) | Standard Employee NI (8% or 2%) | 13.8% Employer Class 1 NIC |
| Payment in Lieu of Notice (PILON / PENP) | Taxed as standard earnings (20%/40%/45%) | Standard Employee NI (8% or 2%) | 13.8% Employer Class 1 NIC |
| Contractual Bonus / Commission Due | Taxed as standard earnings (20%/40%/45%) | Standard Employee NI (8% or 2%) | 13.8% Employer Class 1 NIC |
Notice a major financial benefit: even on the portion of redundancy pay exceeding £30,000, you pay zero employee National Insurance! Only Income Tax applies to the excess. You can model your exact redundancy settlement deductions with our Redundancy Pay Calculator.
2. What Qualifies for the £30,000 Tax-Free Exemption?
To qualify for the statutory £30,000 tax-free exemption under Section 401 ITEPA 2003, the payment must represent genuine compensation for the termination of employment rather than contractual earnings:
- Statutory Redundancy Pay: Mandatory government-mandated redundancy pay under the Employment Rights Act 1996.
- Enhanced / Ex-Gratia Redundancy Pay: Non-contractual severance sums offered by employers under company redundancy policies or settlement agreements.
- Compensation for Loss of Office: Lump sums agreed to settle potential Employment Tribunal claims (such as unfair dismissal claims).
- Certain Restrictive Covenant Settlements: Non-contractual compensation relating to restrictive covenants, provided they meet strict HMRC criteria.
3. Step-by-Step Mathematical Calculation: £55,000 Settlement Package
Let us examine a real-world calculation for an employee with an annual salary of £60,000 (Higher Rate 40% taxpayer) who receives a £55,000 total exit package upon redundancy in 2026/27, comprised of:
- Accrued untaken holiday pay: £5,000
- Payment in Lieu of Notice (PILON / PENP): £10,000
- Genuine enhanced redundancy pay: £40,000
Step 1: Separate General Earnings from Termination Pay
- General Earnings (Holiday + PILON): £5,000 + £10,000 = £15,000.00. This portion does NOT qualify for the £30k exemption.
- Income Tax on General Earnings (40%): £15,000 × 0.40 = £6,000.00
- Employee National Insurance (2% above threshold): £15,000 × 0.02 = £300.00
- Total Deductions on General Earnings: £6,300.00 (Net cash = £8,700.00)
Step 2: Apply the £30,000 Exemption to Redundancy Pay
- Total Redundancy Pay: £40,000.00
- Tax-Free Slice: £30,000.00 (Tax = £0.00, NI = £0.00)
- Taxable Redundancy Excess: £40,000 – £30,000 = £10,000.00
- Income Tax on Excess (40%): £10,000 × 0.40 = £4,000.00
- Employee National Insurance on Excess: £0.00 (NI Exempt!)
- Net Cash from Redundancy Pay: £30,000 + (£10,000 – £4,000) = £36,000.00
Step 3: Total Package Summary
- Gross Exit Package: £55,000.00
- Total Income Tax Paid: £6,000.00 + £4,000.00 = £10,000.00
- Total Employee NI Paid: £300.00
- Total Statutory Deductions: £10,300.00
- Net Cash Received in Bank Account: £44,700.00 (Effective overall tax retention: 81.3%)
4. Tax Rules on Multiple Redundancies from Associated Employers
Under Section 404 ITEPA 2003, HMRC enforces anti-avoidance rules regarding the £30,000 exemption:
- If you receive redundancy payments from two or more connected or associated employers (such as parent companies, subsidiaries, or companies under common control), the £30,000 exemption applies to the aggregate total of all payments combined, not £30,000 per company.
- However, if you are made redundant from completely separate, unconnected employers across different periods in the same or separate tax years, you are entitled to a full £30,000 tax-free exemption for each distinct employment termination.
5. Reporting Termination Payments on Self Assessment
If you complete an annual Self Assessment tax return (Form SA100), you must declare termination payments on the Employment Additional Pages (SA102) if the total termination package exceeds £30,000. Enter the taxable excess above £30,000 in Box 5 (Compensation and lump sums) and the tax deducted in Box 6.
6. HMRC Statutory Legislation & Regulatory References
- Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003): Sections 401–416 dictate the charge to tax on termination payments and the £30,000 threshold.
- HMRC Employment Income Manual (EIM13000): Comprehensive internal guidance on termination payments and settlements.
- Finance Act 2018: Codified Post-Employment Notice Pay (PENP) rules to eliminate tax avoidance on unworked notice pay.
- Employment Rights Act 1996 (Part XI): Legal foundation for statutory redundancy qualifications and weekly caps.
7. Frequently Asked Questions (FAQ)
Q: Is statutory redundancy pay included in the £30,000 tax-free limit?
A: Yes. Statutory redundancy pay is part of your qualifying termination payment and counts toward your £30,000 tax-free exemption.
Q: Do I pay National Insurance on redundancy pay over £30,000?
A: No! Employees pay zero Class 1 National Insurance on redundancy payments, even on the amount exceeding £30,000. Only Income Tax applies to the taxable excess.
Q: Is holiday pay included in the £30,000 exemption?
A: No. Payment for accrued but untaken holiday is contractual earnings and is fully subject to Income Tax and National Insurance from the first pound.
Q: Can I claim a tax refund if my redundancy pay was overtaxed through PAYE?
A: Yes! Because payroll software operates on a monthly cumulative basis, a large termination payment may push you into the 40% or 45% bracket for that month. If your total annual earnings leave you with unused allowance, you can submit Form P50 to HMRC or receive a P800 refund.
Q: How does a settlement agreement handle legal fee contributions?
A: If your employer contributes directly to your solicitor’s fees for advising on a settlement agreement, this payment is completely tax-exempt and does NOT count towards the £30,000 limit, provided payment is made directly to the law firm.
Q: Does redundancy pay affect my Universal Credit or benefits?
A: If your total capital and savings (including redundancy payout) exceed £16,000, your eligibility for Universal Credit stops. Capital between £6,000 and £16,000 reduces your monthly payment under tariff income rules.
Q: Can I sacrifice redundancy pay into my pension?
A: Yes! If your severance exceeds £30,000, you can request a “redundancy pension sacrifice” to pay the taxable excess directly into your pension scheme, completely eliminating income tax on the excess.
Q: Does the £30,000 exemption reset if I change jobs and get made redundant again?
A: Yes. The £30,000 exemption applies per termination of employment, provided the employers are completely independent and unconnected.
Calculate Your HMRC Tax Refund & Overpayment
Put the figures from this guide into practice with our free, HMRC-audited interactive calculation tools: